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RMC Journal of Social Science and Humanities Socio-Political And RMC Journal of Social Science and Humanities Journal Home Page: https://journal.rnmconsultants.org/index.php/about ISSN: 2708-499X DoI: https://doi.org/10.46256/rmcjsochum.v1i1.31 Submission Date: 07-06-2020 Acceptance Date: 24-6-2020. Vol. 1. Issue 1. Socio-Political and Financial Risk Analysis of Infrastructure Projects Linked with China-Pakistan Economic Corridor Wasim Abbas Shaheen1*, Abdul Ghaffar2, Zahid Hussain3, Maqsood Ali4 1University of International Business and Economics, Beijing, P.R. China and Quaid-i-Azam University, Islamabad, Pakistan 2School of Statistics, Dongbei University of Finance and Economics, Dalian, P.R. China and Higher Education Department Punjab, Lahore, Pakistan 3University of International Business and Economics, Beijing, P.R. China 4Department of Statistics, Ludwig-Maximilians-University Munich, Germany *Corresponding Email: [email protected] Abstract: China-Pakistan Economic Corridor (CPEC) is more than just a project between Pakistan and China because it will have financial, economic and social changes at massive level around the globe especially in Asian region. Multiple projects have been planned under the umbrella of CPEC including construction and extension of highways, railways, special economic zones to connect China from Kashgar to Gawadar in Pakistan. This project will have a massive infrastructural development in Pakistan. Rehabilitation and Expansion of Karachi-Peshawar Railway Line known as ML-1 to be completed in 6 years approximately is one of the vital infrastructure projects in this mass transit corridor. This is the oldest and busiest rail line in Pakistan for passengers as well as cargo transfer with almost 75% share of the country’s transfer. The approximate cost allocation on that project is $8 billion which is shared by the Government of China and Asian Development Bank (ADB). This route is covering KPK, Punjab and Sindh Provinces. These provinces have different political ruling parties. We have concluded that to deal with any kind of possible delay or termination of the project, the sponsoring agency and guarantor involved must make sure the transparency in this whole process. Keywords: Transit Corridor, Infrastructure Development, Financial Risk Factors, Socio- Political Analysis, Socio-Economic Analysis. 1. Introduction China-Pakistan Relationship China-Pakistan Economic Corridor (CPEC) is the greatest opportunity for improving the economic, social, infrastructural and all other related parts of the country for Pakistan as well as its neighboring countries too. The better relationship with all neighboring countries is always a key foreign policy of Pakistan right after the independence 1947 till now. But to sustain a very good relationship with China from 1949 after its independence is always placed on top priority list in Pakistan’s foreign policy strategies. Especially from last couple of decades, to balance power shift in the region China has emerged as the key strategic partner of Pakistan. China has helped 34 W.A.Shaheen et al. Socio-Political and Financial Risk Analysis of Infrastructure Projects Linked with China-Pakistan Economic Corridor and second Pakistan’s point on all international forums around the globe and CPEC is the outcome of this esteem relationship exists between these two countries. (Abid & Ashfaq 2015). China-Pakistan Economic Corridor (CPEC) – Some Facts As part of the one belt one road initiative policy, CPEC is totally 3218 kilometers in length. It includes different infrastructure projects including railways track, highways, and pipelines starting from Kashgar in China connecting Arabian Sea by Gawadar Port going through Gilgit-Bultistan in North of Pakistan (Ramany, 2016). It is the source of economic development and it will contribute a lot to improve people’s prosperity level in the country. But it will have a transformational strategic impact (Shah, 2016). According to Chinese Ambassador, Mr. Sun Weidong, the said project is not only a project that will give the trade benefits to both sides but it is actually “one corridor, multiple passages” in nature for China and Pakistan (Weidong, 2016). It involves different projects in the Pakistan including investments in energy sector, infrastructure development, economic growth and transportation system improvement. It also helps to improve the regional cooperation and trade diversification and improve socio-political situation in the country (Abid & Ashfaq 2015). All planned projects have been implemented properly till now and it was about 17% of the Pakistan’s GDP in 2015. This project will open up new doors of trade and will be proved as a gateway not only among these two neighboring countries but it will boost trade activities in African and Middle East region too (Khalid, 2015). This will also support to have rapid development in Xinjiang province too which is least developed province too in different sectors including security, energy, infrastructure and industrial development. This will also improve the FDI and cheaper trade in the country (Ritzinger, 2015). According to different analysis done by Rafi et al (2016), this project has enhanced investment to GDP growth rate by 1.5% in three years from 2016 to 2018. This will provide safe ground to private investors to enjoy higher profits due to positive and stable economic environment, and energy generation etc. Table 1 provides some basic summarized financial statistics related to CPEC. Table 1: Impact of CPEC on Growth Economic Indicators Values TI (US $ Billion) $46.00 TI (% of GDP ) 16.00% Change in Investment/GDP ratio (% of GDP) 5.30% IPSI (% of GDP) 1.80% AGGP (% of GDP) 0.50% % of TIGGP (% Points) 2.00% Note: TI is the total investment, GDP is gross domestic product, IPSI is Increment Private Sector Investment, AGGP is Additional GDP growth potential and TIGGP is Total increase in GDP growth potential. Source: Ramay, S.A. (2016) According to Talwar (2015), all favorable factors will also prove to a greatest opportunity for China to strengthen its access to Indian Ocean through Gawadar Port. But with every opportunity there is always different challenges we have to face. That is why China will also have to face different internal and as well as external challenges in Pakistani region because of different political environment prevailing in that region. Indeed, this huge investment of US$46 billion in different projects associated with CPEC provide Pakistan an exceptional opportunity to deal different barriers on the way of economic development including energy crises, proper 35 RMC Journal of Social Science and Humanities (2020) Vol. 1. Issue 1. connectivity and limited attraction with the foreign investors to attract FDI in the country. A total of 61% CPEC investment will be allocated on energy related projects to meet the energy crises in Pakistan. According to their estimates this will cost about 2 to 2.5% of GDP and will add approximately 10400 Mega Watt in the Pakistani energy system by the end of their first phase till 2018 (Wilson Center, 2016). In order to improve the connectivity infrastructure in Pakistan up to 36% of CPEC funding will be used in different projects of infrastructure, transportation and communication that will create a lot of new opportunities in Pakistan. This infrastructure development will also promote the domestic trade too and it will also facilitate the local product for better exports too. In addition to that, CPEC will also help to attract new potential foreign investors to come to Pakistan and make more and more investments in the country. Study Objectives In this study, we will focus on the infrastructural development due that mega agreement between China and Pakistan. Analyzing the potential challenges related to CPEC both internally and externally is the prime focus of our study. There are two main objectives of our study, First of all we will analyze the role Government of Pakistan in this mega project from the infrastructural development point of view specifically rail road infrastructures. Secondly, we Pakistan has different dynamics regarding its political, social and geographical setups. By keeping in mind all these factors, we will analyze what are the main challenges both internally as well as externally that the Government of Pakistan has to face towards the smooth running and completion of this project. By the end we have also provided some useful suggestions to deal with these challenges in a better way which can be acceptable for all stakeholders. We have divided this study into 5 sections. Section 1 is about introduction; a brief literature review about the transit corridor and CPEC is given in section 2; data and financial aspects have been explained in section 3 while data analysis and discussions have been presented in section 4 and in section 5 we have concluded the whole discussion and provides important policy suggestions and future directions to open up new doors of research. 2. Literature Review Transit Corridor According to the Chinese Embassy’s Economic and Commercial Counselor’s Office of in Pakistan, a transit corridor has been initially proposed by President General Pervez Musharaf then in 2016. The proposal was to connect West China from Xinjiang with North Pakistan from Gilgit and extend towards Arabian Sea from Baluchistan. This transit corridor also has a lot of interests for China in many ways too. By using this route China can save billions of dollars every year by minimizing the transportation cost through trade with Middle Eastern, European, Central Asian and African regions. For example, up to USD $2 every year China would save through oil supplies imports and increase by 50% in volume by using this route (PRIME Institute, 2015). In addition to that through that connectivity, China can also make a lot of development in the Xinjiang Province too to reduce the threats of terrorism the Chinese authorities consider. This mass transit project will also help to balance the power shift of China and USA around the globe. This route will also enhance Chinese influence in Asia and Indian Ocean as well.
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